Square Hammer Corp. shows the following information on its 2018 income statement:

Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $226,000; Costs = $122,000; Other expenses = $7,900; Depreciation expense = $17,900; Interest expense = $14,700; Taxes = $22,225; Dividends = $12,000. In addition, you’re told that the firm issued $6,200 in new equity during 2018 and redeemed $4,700 in outstanding long-term debt.

 

a.   
What is the 2018 operating cash flow? (Do not round intermediate calculations.)

b.    What is the 2018 cash flow to creditors? (Do not round intermediate calculations.)
c.    What is the 2018 cash flow to stockholders? (Do not round intermediate calculations.)
d.    If net fixed assets increased by $30,000 during the year, what was the addition to NWC? (Do not round intermediate calculations.)


Explanation:

To find the OCF, we first calculate net income.

Income Statement
Sales	$	226,000
Costs		122,000
Other expenses		7,900
Depreciation		17,900
EBIT	$	78,200
Interest		14,700
Taxable income	$	63,500
Taxes		22,225
Net income	$	41,275
Dividends	$	12,000
Additions to RE	$	29,275

 
a.

OCF = EBIT + Depreciation – Taxes

OCF = $78,200 + 17,900 – 22,225

OCF = $73,875

 
b.

CFC = Interest – Net new LTD

CFC = $14,700 – (–4,700)

CFC = $19,400

Note that the net new long-term debt is negative because the company repaid part of its long-term debt.

c.

CFS = Dividends – Net new equity

CFS = $12,000 – 6,200

CFS = $5,800

d.

We know that CFA = CFC + CFS, so:

CFA = $19,400 + 5,800

CFA = $25,200

CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital spending is equal to:

Net capital spending = Increase in NFA + Depreciation

Net capital spending = $30,000 + 17,900

Net capital spending = $47,900

Now we can use:

CFA = OCF – Net capital spending – Change in NWC

$25,200 = $73,875 – 47,900 – Change in NWC

Change in NWC = $775

This means that the company increased its NWC by $775.